Admissible Deductions from Income for Salaried Employees

Admissible Deductions under Chapter VI A and Section 16 of Income Tax Act 1961

Deductions from Salaries under Section 16 of Income Tax Act

Entertainment Allowance [Section 16(ii)]:

A deduction is also allowed under section 16(ii) in respect of any allowance in the nature of an entertainment allowance specifically granted by an employer to the assessee, who is in receipt of a salary from the Government, a sum equal to one-fifth of his salary(exclusive of any allowance, benefit or other perquisite) or five thousand rupees whichever is less. No deduction on account of entertainment allowance is available to non-government employees.

Tax on Employment [Section 16(iii)]:

The tax on employment (Professional Tax) within the meaning of article 276(2) of the Constitution of India, leviable by or under any law, shall also be allowed as a deduction in computing the income under the head “Salaries”.

It may be clarified that “Standard Deduction” from gross salary income, which was being

allowed up to financial year 2004-05 is not allowable from financial year 2005-06 onwards.

Deductions under Chapter VI A of Income Tax Act 1961

In computing the taxable income of the employee, the following deductions under Chapter VI-A

Section 80C, entitles an employee to deductions for the whole of amounts paid or deposited in the current financial year in the following schemes, subject to a limit of Rs.1,50,000/-:

(1) Payment of insurance premium to effect or to keep in force an insurance on the life of the individual, the spouse or any child of the individual.

(2) Any payment made to effect or to keep in force a contract for a deferred annuity, not being an annuity plan as is referred to in item (7) herein below on the life of the individual, the spouse or any child of the individual, provided that such contract does not contain a provision for the exercise by the insured of an option to receive a cash payment in lieu of the payment of the annuity;

(3) Any sum deducted from the salary payable by, or, on behalf of the Government to any individual, being a sum deducted in accordance with the conditions of his service for the purpose of securing to him a deferred annuity or making provision for his spouse or children, in so far as the sum deducted does not exceed 1/5th of the salary;

(4) Any contribution made :

(a) by an individual to any Provident Fund to which the Provident Fund Act, 1925 applies;

(b) to any provident fund set up by the Central Government, and notified by it in this behalf in the Official Gazette, where such contribution is to an account standing in the name of an individual, or spouse or children;

(c) by an employee to a Recognized Provident Fund;

(d) by an employee to an approved superannuation fund;

It may be noted that “contribution” to any Fund shall not include any sums in repayment of loan or advance;

(5) Any subscription :-

(a) to any such security of the Central Government or any such deposit scheme as the Central Government may, by notification in the Official Gazette, specify in this behalf;

(b) to any such saving certificates as defined under section 2(c) of the Government Saving Certificate Act, 1959 as the Government may, by notification in the Official Gazette, specify in this behalf.
(6) Any sum paid as contribution in the case of an individual, for himself, spouse or any child,

a. for participation in the Unit Linked Insurance Plan, 1971 of the Unit Trust of India;

b. for participation in any unit-linked insurance plan of the LIC Mutual Fund referred to section 10 (23D) and as notified by the Central Government.

(7) Any subscription made to effect or keep in force a contract for such annuity plan of the Life Insurance Corporation or any other insurer as the Central Government may, by notification in the Official Gazette, specify;

(8) Any subscription made to any units of any Mutual Fund, of section 10(23D), or from the

Administrator or the specified company referred to in Unit Trust of India (Transfer of Undertaking

& Repeal) Act, 2002 under any plan formulated in accordance with any scheme as the Central

Government, may, by notification in the Official Gazette, specify in this behalf;

The investments made after 1.4.2006 in plans formulated in accordance with Equity Linked Saving Scheme, 1992 or Equity Linked Saving Scheme, 1998 shall also qualify for deduction under section 80C.

(9) Any contribution made by an individual to any pension fund set up by any Mutual Fund referred to in section 10(23D), or, by the Administrator or the specified company defined in Unit Trust of India (Transfer of Undertaking & Repeal) Act, 2002, as the Central Government may, by notification in the Official Gazette, specify in this behalf;

(10) Any subscription made to any such deposit scheme of, or, any contribution made to any such pension fund set up by, the National Housing Bank, as the Central Government may, by notification in the Official Gazette, specify in this behalf;

(11) Any subscription made to any such deposit scheme, as the Central Government may, by notification in the Official Gazette, specify for the purpose of being floated by (a) public sector companies engaged in providing long-term finance for construction or purchase of houses in India for residential purposes, or, (b) any authority constituted in India by, or, under any law, enacted either for the purpose of dealing with and satisfying the need for housing accommodation or for the purpose of planning, development or improvement of cities, towns and villages, or for both.

(12) Any sums paid by an assessee for the purpose of purchase or construction of a residential house property, the income from which is chargeable to tax under the head “Income from house property” (or which would, if it has not been used for assessee’s own residence, have been chargeable to tax under that head) where such payments are made towards or by way of any instalment or part payment of the amount due under any self-financing or other scheme of any Development Authority, Housing Board etc.

The deduction will also be allowable in respect of re-payment of loans borrowed by an assessee from the Government, or any bank or Life Insurance Corporation, or National Housing Bank, or certain other categories of institutions engaged in the business of providing long term finance for construction or purchase of houses in India. Any repayment of loan borrowed from the employer will also be covered, if the employer happens to be a public company, or a public sector company, or a university established by law, or a college affiliated to such university, or a local authority, or a cooperative society, or an authority, or a board, or a corporation, or any other body established under a Central or State Act.

The stamp duty, registration fee and other expenses incurred for the purpose of transfer shall also be covered. Payment towards the cost of house property, however, will not include, admission fee or cost of share or initial deposit or the cost of any addition or alteration to, or, renovation or repair of the house property which is carried out after the issue of the completion certificate by competent authority, or after the occupation of the house by the assessee or after it has been let out. Payments towards any expenditure in respect of which the deduction is allowable under the provisions of section 24 of the Act will also not be included in payments towards the cost of purchase or construction of a house property.

Where the house property in respect of which deduction has been allowed under these provisions is transferred by the tax-payer at any time before the expiry of five years from the end of the financial year in which possession of such property is obtained by him or he receives back, by way of refund or otherwise, any sum specified in section 80C(2)(xviii), no deduction under these provisions shall be allowed in respect of such sums paid in such previous year in which the transfer is made and the aggregate amount of deductions of income so allowed in the earlier years shall be added to the total income of the assessee of such previous year and shall be liable to tax accordingly.

(13) Tuition fees, whether at the time of admission or thereafter, paid to any university, college, school or other educational institution situated in India, for the purpose of full-time education of any two children of the employee.

Full-time education includes any educational course offered by any university, college, school or other educational institution to a student who is enrolled full-time for the said course. It is also clarified that full-time education includes play-school activities, pre-nursery and nursery classes.

It is clarified that the amount allowable as tuition fees shall include any payment of fee to any university, college, school or other educational institution in India except the amount representing payment in the nature of development fees or donation or capitation fees or payment of similar nature.

(14) Subscription to equity shares or debentures forming part of any eligible issue of capital made by a public company, which is approved by the Board or by any public finance institution.

(15) Subscription to any units of any mutual fund referred to in clause (23D) of Section 10 and approved by the Board, if the amount of subscription to such units is subscribed only in eligible issue of capital of any company.

(16) Investment as a term deposit for a fixed period of not less than five years with a scheduled bank, which is in accordance with a scheme framed and notified by the Central Government, in the Official Gazette for these purposes.

(17) Subscription to such bonds issued by the National Bank for Agriculture and Rural Development, as the Central Government may, by such notification in the Official Gazette, specify in this behalf.

(18) Any investment in an account under the Senior Citizens Savings Scheme Rules, 2004.

(19) Any investment as five year time deposit in an account under the Post Office Time Deposit Rules, 1981.

Section 80CCC allows an employee deduction of an amount paid or deposited out of his income chargeable to tax to effect or keep in force a contract for any annuity plan of Life Insurance Corporation of India or any other insurer for receiving pension from the Fund referred to in section 10(23AAB). However, the deduction shall exclude interest or bonus accrued or credited to the employee’s account, if any and shall not exceed Rs. 1 lakh.

However, if any amount is standing to the credit of the employee in the fund referred to above and deduction has been allowed as stated above and the employee or his nominee receives this amount together with the interest or bonus accrued or credited to this account due to the reason of

(i) Surrender of annuity plan whether in whole or part

(ii) Pension received from the annuity plan

then the amount so received during the Financial Year shall be the income of the employee or his nominee for that Financial Year and accordingly will be charged to tax.

Where any amount paid or deposited by the employee has been taken into account for the purposes of this section, a deduction with reference to such amount shall not be allowed under section 80C.

Deduction in respect of contribution to pension scheme of Central Government (Section 80CCD):

Section 80CCD (1) allows an employee, being an individual employed by the Central Government or by any other employer on or after 01.01.2004, or any other assessee being an individual, a deduction of an amount paid or deposited out of his income chargeable to tax under National Pension System –NPS or as may be notifed by the Central Government.

However, the deduction shall not exceed an amount equal to 10% of his salary (includes Dearness Allowance but excludes all other allowance and perquisites). The deduction under section 80CCD(1) shall not exceed Rs. 1,00,000/-.

As per Section 80CCD(2), where any contribution in the said pension scheme is made by the Central Government or any other employer then the employee shall be allowed a deduction from his total income of the whole amount contributed by the Central Government or any other employer subject to limit of 10% of his salary of the previous year.

It is emphasized that as per the section 80CCE the aggregate amount of deduction under sections 80C, 80 CCC and Section 80 CCD(1) shall not exceed Rs.1,50,000/-.

However, the deduction under Section 80 CCD (1) shall not exceed Rs.1,00000 but contribution made by the Central Government or any other employer to a pension scheme u/s 80CCD(2) shall be excluded from the limit of Rs.1,00,000/- provided under this Section.

Deduction in respect of investment made under an equity savings scheme (Section 80 CCG):

Section 80CCG provides deduction w.e.f .assessment year 2013-14 in respect of investment made under notified equity saving scheme. Rajiv Gandhi Equity Savings Scheme 2012 has been notified vide SO No 2777 E dated 23.11.2012 as a scheme under this section. The scheme was modified in December 2013 vide notification SO No. 3693 dated 18.12.2013 as RGESS 2013. The deduction under this section in accordance with RGESS 2013, is available if following conditions are satisfied:

(a) The assessee is a resident individual

(b) His gross total income does not exceed Rs. 12 lakhs;

(c) He has acquired listed shares in accordance with a notified scheme or listed units of an equity oriented fund as defined in section 10(38);

(d) The assessee is a new retail investor;

(e) The investment is locked-in for a period of 3 years from the date of acquisition in accordance with the above scheme;

(f) The assessee satisfies any other condition as may be prescribed.

Amount of deduction –The amount of deduction is at 50% of amount invested in equity shares/units. However, the amount of deduction under this provision cannot exceed Rs. 25,000.

Withdrawal of deduction – If the assessee, after claiming the aforesaid deduction, fails to satisfy the above conditions, the deduction originally allowed shall be deemed to be the income of the assessee of the year in which default is committed.

This deduction is allowed for three consecutive assessment years beginning with the AY in which the listed equity shares or units were first acquired. If any deduction is claimed by a taxpayer under this section in any year, he shall not be entitled to any deduction under this section for any other year.

Section 80D provides for deduction available for health insurance premia paid, etc. which is calculated as under:

Persons for whom payment made

Nature of payment

Mode of

payment

Allowable

Deduction

(in Rs)

Employee

or his family

v the whole of the amount paid to effect or to

keep in force an insurance on the health of the employee or his family or

v any contribution made to the CGHS or such other scheme as may be notified by Central Government (Finance Act 2013)

v any payment on account of preventive health check-up of the employee or family, [restricted to Rs 5000/-; cash payment allowed here]

any

mode other than cash

Aggregate

allowable is

Rs 15,000/

{For Senior Citizens it is Rs 20000/-}.

Parent or

Parents of employee

v the whole of the amount paid to effect or keep

in force an insurance on the health of the parent or parents of the employee or

v any payment made on account of preventive health check-up of the parent or parents of the employee [restricted to Rs 5000/-; cash payment allowed here]

any

mode other than cash

Aggregate

allowable is

Rs 15,000/

{For Senior Citizens it is Rs 20000/-}

Deductions in respect of expenditure on persons or dependants with disability

Deductions in respect of maintenance including medical treatment of a dependent who is a person with disability (section 80DD):

Under section 80DD, where an employee, who is a resident in India, has, during the previous year-

(a) incurred any expenditure for the medical treatment (including nursing), training and rehabilitation of a dependant, being a person with disability; or

(b) paid or deposited any amount under a scheme framed in this behalf by the Life Insurance Corporation or any other insurer or the Administrator or the specified company subject to the conditions specified in this regard and approved by the Boardin this behalf for the maintenance of a dependant, being a person with disability, the employee shall be allowed a deduction of a sum of fifty thousand rupees from his gross total income of that year.

However, where such dependant is a person with severe disability, an amount of one hundred thousand rupees shall be allowed as deduction subject to the specified conditions.

The deduction under (b) above shall be allowed only if the following conditions are fulfilled:-

(i) the scheme referred to in (b) above provides for payment of annuity or lump sum amount for the benefit of a dependant, being a person with disability, in the event of the death of the individual in whose name subscription to the scheme has been made;

(ii) the employee nominates either the dependant, being a person with disability, or any other person or a trust to receive the payment on his behalf, for the benefit of the dependant, being a person with disability.

However, if the dependant, being a person with disability, predeceases the employee, an amount equal to the amount paid or deposited under sub-para(b) above shall be deemed to be the income of the employee of the previous year in which such amount is received by the employee and shall accordingly be chargeable to tax as the income of that previous year.

Deductions in respect of a person with disability (section 80U):

Under section 80U, in computing the total income of an individual, being a resident, who, at any time during the previous year, is certified by the medical authority to be a person with disability, there shall be allowed a deduction of a sum of fifty thousand rupees. However, where such individual is a person with severe disability, a higher deduction of one lakh rupees shall be allowable.

Deduction in respect of medical treatment, etc. (Section 80DDB):

Section 80DDB allows a deduction in case of employee, who is resident in India, during the previous year, of any amount actually paid for the medical treatment of such disease or ailment as may be specified in the rules 11DD (1) for himself or a dependant. The deduction allowed is equal to the amount actually paid or Rs. 40,000 whichever is less. Further the amount paid should also be reduced by the amount received if any under insurance from an insurerer or reimbursed by an employer. In case of a senior citizen (an individual resident in India who is of the age of sixty years or more at any time during the relevant previous year) the amount of deduction allowed is Rs. 60,000/-.

Deduction in respect of interest on loan taken for higher education (Section 80E):

Section 80E allows deduction in respect of payment of interest on loan taken from any financial institution or any approved charitable institution for higher education for the purpose of pursuing his higher education or for the purpose of higher education of his spouse or his children or the student for whom he is the legal guardian.

Deduction in respect of interest on loan taken for residential house property (Section 80EE):

Vide Finance Act 2013, an individual is allowed a deduction upto a limit of Rs 1,00,000 being paid as interest on a loan taken from a Financial Institution, sanctioned during the period 01-04-
2013 to 31-03-2014 (loan not to exceed Rs 25 lakhs) for acquisition of a residential house whose value does not exceed Rs 40 lakhs. However the deduction is available if the assessee does not own any residential house property on the date of sanction of the loan.

If in case of above loan the interest claimed during AY 2014-15 is less than Rs. 1,00,000/- then the balance amount is allowed in AY 2015-16.

Section 80G provides for deductions on account of donation made to various funds , charitable organizations etc. In cases where employees make donations to the Prime Minister’s National Relief Fund, the Chief Minister’s Relief Fund or the Lieutenant Governor’s Relief Fund through their respective employers, it is not possible for such funds to issue separate certificate to every such employee in respect of donations made to such funds as contributions made to these funds are in the form of a consolidated cheque. An employee who makes donations towards these funds is eligible to claim deduction under section 80G. It is, hereby, clarified that the claim in respect of such donations as indicated above will be admissible under section 80G on the basis of the certificate issued by the Drawing and Disbursing Officer (DDO)/Employer in this behalf – Circular No. 2/2005, dated 12-1-2005.

No deduction under this section is allowable in case of amount of donation if exceeds Rs

10000/- unless the amount is paid by any mode other than cash.

Deductions is respect of rents paid (Section 80GG):

Section 80GG allows the employee to a deduction in respect of house rent paid by him for his own residence. Such deduction is permissible subject to the following conditions :-

(a) the employee has not been in receipt of any House Rent Allowance specifically granted to him which qualifies for exemption under section 10(13A) of the Act;

(b) the employee files the declaration in Form No.10BA. (Annexure X)

(c) The employee does not own:

(i) any residential accommodation himself or by his spouse or minor child or where such employee is a member of a Hindu Undivided Family, by such family, at the place where he ordinarily resides or performs duties of his office or carries on his business or profession; or

(ii) at any other place, any residential accommodation which is in the occupation of the employee, the value of which is to be determined under section 23(2)(a) or section 23(4)(a), as the case may be.

(d) He will be entitled to a deduction in respect of house rent paid by him in excess of 10% of his total income. The deduction shall be equal to 25% of total income or Rs. 2,000/- per month, whichever is less. The total income for working out these percentages will be computed before making any deduction under section 80GG.

Drawing and Disbursing Authorities should satisfy themselves that all the conditions mentioned above are satisfied before such deduction is allowed by them to the employee. They should also satisfy themselves in this regard by insisting on production of evidence of actual payment of rent.

Deductions in respect of certain donations for scientific research or rural development (Section 80 GGA):

Section 80GGA allows deduction from total income of employee in respect of donations of any sum as given in the Table below:

Donations made to persons

Approval /

Notification under Section

Authority granting approval/ Notification

a research association which has as its object the

undertaking of scientific research or to a University, college or other institution to be used for scientific research

u/s 35(1)(ii)

Central Government

a research association which has as its object the

undertaking of research in social science or statistical research or to a University, college or other institution to

be used for research in social science or statistical

research

u/s 35(1)(iii)

Central Government

an association or institution, which has as its object the

undertaking of any programme of rural development, to be used for carrying out any programme of rura development approved for the purposes of section 35CCAl

furnishes the

certificate u/s

35CCA (2)

Prescribed Authority

under Rule 6AAA

an association or institution which has as its object the

training of persons for implementing programmes of rural development.

furnishes the

certificate u/s

35CCA (2A)

Prescribed Authority under Rule 6AAA

a public sector company or a local authority or to an

association or institution approved by the National

Committee, for carrying out any eligible project or scheme.

furnishes the

certificate u/s

35AC(2)(a)

National Committee

for Promotion of

Social & Economic

Welfare

a rural development fund

notified u/s

35CCA (1)(c)

set up and notified by the Central

Government

National Urban Poverty Eradication Fund

notified u/s

35CCA (1)(d)

set up and notified by

the Central

Government

No deduction under this section is allowable in case:

i) The employee has gross total income which includes income which is chargeable under the head “Profits and gains of business or profession”.

ii) The amount of donation exceeds Rs 10000 and is paid in cash.

The Drawing and Disbursing Authorities should satisfy themselves that all the conditions mentioned above are satisfied before such deduction is allowed by them to the employee. They should also satisfy themselves in this regard by insisting on production of evidence of actual payment of donation and a receipt from the person to whom donation has been made and ensure that the approval/notification has been issued by the right authority. DDO must ensure a self- declaration from the employee that he has no income from “Profits and gains of business or profession”.

Deduction in respect of interest on deposits in savings account (Section 80TTA):

Section 80TTA has been introduced from the Financial Year 2012-13 and it allows to an employee from his gross total income if it includes any income by way of interest on deposits (not being time deposits) in a savings account, a deduction amounting to:

(i) in a case where the amount of such income does not exceed in the aggregate ten thousand rupees, the whole of such amount; and

(ii) in any other case, ten thousand rupees.

The deduction is available if such savings account is maintained in a

(a) banking company to which the Banking Regulation Act, 1949, applies (including any bank or banking institution referred to in section 51 of that Act);

(b) co-operative society engaged in carrying on the business of banking (including a co- operative land mortgage bank or a co-operative land development bank); or

(c) Post Office as defined in clause (k) of section 2 of the Indian Post Office Act, 1898,

For this section, “time deposits” means the deposits repayable on expiry of fixed periods.

Rebate of Rs. 2000 for Individuals having total income up to Rs. 5 lakh (Section 87 A)

Finance Act 2013 provided relief in the form of rebate to individual taxpayers, resident in India, who are in lower income bracket, i. e. having total income not exceeding Rs 5,00,000/-. The amount of rebate is Rs 2000/- or the amount of tax payable, whichever is lower. This rebate is available for A.Y. 2014-15 and subsequent assessment years.